SQUARE FEET: VENTURES; Why REIT Shoppers Are Heading to the Malls

By VIVIAN MARINO

Published: April 1, 2007

INVESTORS shopping for loftier returns may want to peruse the regional malls and the shopping centers -- or at least the real estate investment trusts that own them.

These types of properties offer among the highest returns of all REIT categories, yet they are still considered by some people to be generally undervalued. And many industry analysts predict that they will outpace the market this year, even as the growth of REITs over all is expected to decelerate after a seven-year run.

From the beginning of the year through last Thursday, REITs owning regional malls and shopping centers returned 11.98 percent and 5.23 percent, respectively, and REITs owning free-standing stores, another subsector, were up 1.34 percent, according to the National Association of Real Estate Investment Trusts. The retail REIT sector as a whole was up 8.31 percent.

By contrast, equity REITs over all -- dividend-paying companies with portfolios of property of any sort -- returned 2.14 percent, the association said, while the Standard & Poor's 500-stock index, was nearly flat.

''There is still a good deal of interest in real estate, although that will begin to attenuate at some point,'' said John J. Kriz, the managing director of real estate finance for Moody's Investors Service. But, he added, ''retail space, especially the higher-end regional mall, is one of the more stable real estate types.''

Free-spending consumers and a steady economy can be thanked. Spending growth averaged 3.3 percent annually from 1990 through 2000, according to the Bureau of Labor Statistics, and was expected to grow 3.6 percent annually from 2000 through 2010.

''A pretty large segment of consumers are doing well -- unemployment is low, jobs are being created -- and they like to go out and shop, whether it's for daily necessities or luxury items,'' said Ralph L. Block, the author of ''Investing in REITs'' (Bloomberg Press, 2006) and the publisher of The Essential REIT, a newsletter. ''You can't buy everything online,'' he added.

At the same time, developments can't seem to be built fast enough, as more retailers look to expand into new spaces to raise revenue.

''Demand for space is outstripping supply,'' said David M. Fick, a managing director at Stifel Nicolaus. He noted that rent spreads, or the difference between what tenants pay for new leases and expiring leases, are increasing steadily as a result. ''There has been 20 percent average rent spreads on the higher-quality mall portfolios,'' he said, ''and on the more average-quality portfolios, high single digits.''

''They're just not building many regional malls; they're very expensive and very difficult to get approval for,'' explained Richard C. Moore, a managing director at RBC Capital Markets. ''Communities like going to them once they're in place, but they don't like them coming to their own towns, taking up enormous amounts of space and tying up traffic.''

As a result, mall occupancy rates are high -- 93 percent, on average, not including seasonal vendors, according to Mr. Block. A decade ago, he said, the rate averaged 87 percent, he said.

Shopping-center REITs, which generally own open-air complexes that include community centers anchored with supermarkets or big-box retailers, have occupancy rates closer to 95 percent, on average, he said. Local approval for them, though, is generally easier to obtain.

The Simon Property Group, the largest retail REIT, expects to spend more than $5 billion over the next four years developing retail projects, and not one will be an enclosed mall, said Stephen E. Sterrett, the chief financial officer.

Instead, the company, like its competitors, has been developing more so-called lifestyle centers, which are upscale shopping complexes that mimic urban streetscapes, and adding mixed-use projects.

Last month, Simon opened the Domain in Austin, Tex.; it combines 700,000 square feet of retail and restaurant space with 75,000 square feet of office space and 390 residential apartments. Just north of Austin, the Round Rock Premium Outlets complex, developed through the Chelsea Property Group subsidiary that Simon acquired in 2004, was designed like a village with pedestrian courtyards and fountains. It opened last summer.

''We are busier today than at any other time in our company's history at building retail projects in the United States,'' Mr. Sterrett said. ''Some of them are new; some of them are expansions of existing projects.''

Many industry analysts give Simon high marks. ''They have a very good development pipeline, with opportunities overseas,'' Mr. Moore said, ''and a great balance sheet.''

Mr. Fick agreed, adding that ''owning Chelsea will generate a significant amount of earnings growth not currently reflected in anyone's estimates.''

He likes some of the smaller retail REITs as well, like Kite Realty and Cedar Shopping Centers, each of which focuses on neighborhood and community shopping centers, because of their development projects. And he is bullish on the retail REIT sector in general. ''The group over all will continue to beat all the major markets,'' he said.